Green with liability -- European Liability Directive

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Following developments on the implementation of the European Liability Directive, Pierre Sonigo explores its implications for captives and operators in the region.

To investigate the slow implementation of the Environment Liability Directive (ELD), the European Commission gathered together 200 experts in Brussels in November 2011 “to discuss and explore difficulties, causes, challenges and pathways for possible solutions”. Why is the implementatiown of the ELD so slow? Is it too complex? Are there sufficient cases? Or is it simply a lack of interest from the operators and the relevant authorities?

The main features of the ELD

The Directive 2004/35/CE of the European Parliament and of the Council of April 24, 2004, commonly called the Environmental Liability Directive (ELD), had two objectives: the prevention and the remediation of environmental damage. Environmental damage is defined as damage to protected species and natural habitats (“nature”), damage to water and damage to soil. We can immediately note that this is much broader than the simple definition of “pollution” used in most insurance contracts.

The liable party is the “operator” who carries out occupational activities. The general principle is that polluters pay for any fault-based damage they cause to nature. A strict liability regime (no fault) applies to certain operators which perform dangerous activities, listed in Annex III of the Directive.

There are some cases for exoneration of liability, for example, force majeure, armed conflict, third party intervention. The framework of the directive has provided each member state with the opportunity to accept as a defence the granting of a permit to operate prior to the accident (permit defence), or that the scientific knowledge on the potential toxicity of the substances involved was not sufficient to anticipate the damages resulting from the accident (state of the art defence).

Finally, operators have to take preventive actions if there is an imminent threat of environmental damage and have an obligation to remedy, at their own cost, damage when it has occurred (paying a fine or financial compensation is not satisfactory).

An effective directive?

A report, prepared by the Commission for the Council, the European parliament and two other committees and published in October 2010, assessed the effectiveness of the ELD through its transposition into national laws and its effective implementation.

The report noted that although the directive entered into force on April 30, 2004, only four member states met the transposition deadline of April 30, 2007. It took almost three more years and several constraining judgments from the European Court of Justice to have the directive transposed on to the legislation of all 27 member states.

The main reasons for the transposition delays were related to difficulties in fitting the new regulation into existing legal frameworks on environmental liability, the complexity of the technical requirements of the directive with respect to the economic valuation of damages and the different types of remediation, and the many options left open to member states at the time of transposition.

This resulted in broad divergence concerning several key implementing provisions among the member states, including that:

• The definition of what is an operator can vary widely in each state;

• Fewer than half of the member states allowed the “permit defence” or the “state of the art defence” to be invoked by operators, a similar number decided not to allow either defence, and the remaining states admitted only one of the two defences;

• For multi-party causation, most member states opted for a system of joint and multiple liability, while a minority chose proportionate liability; and

• Regarding financial security, the issue is left to the discretion of the member states. Eight have introduced mandatory financial security measures, which will enter into force at various dates between now and 2014, while the remaining states will rely on voluntary financial security.

"The threat of a mandatory financial guarantee scheme, at first considered small, may be increasing."

The long delay in transposing the directive revealed that little practicalexperience on its implementation is available thus far. Authorities often did not have rules compliant with the ELD in place or on time. Operators were often unaware of the specific legal obligations. Insurers and other institutions offering financial security were not sufficiently familiar with the requirements their products had to meet to be ELD-compliant. Thus the available information does not yet allow for concrete conclusions to be drawn about the effectiveness of the directive in remedying environmental damage.

Few accidents reported

An issue of concern with this directive is the very small number of cases which would fall under its specifications. The Commission’s report identified 16 cases treated under the ELD at the beginning of 2010, and estimates that the total number of ELD cases across the EU may be now around 50.

The report explains that the low number of cases can be attributed to the limited knowledge of operators; it is not envisaged that increased knowledge on the part of the operators will increase this number. In fact I believe that operators that are aware of the added potential liabilities under the ELD will carry out better risk assessment of, and accident prevention work in, the locations concerned (those close to Natura 2000 habitats—an ecological network of protected areas in the EU territory).

Will we see more cases in the future? I doubt it, because environmental accidents that generate damage to biodiversity as specified in the ELD are, and will remain, rare, particularly because of the preventive effect of the directive.

Remedial costs have been estimated in the Commission report at between €12,000 and €250,000. These, again, are relatively small amounts but there is no doubt that occasionally (perhaps once every 10 years) a major incident will generate damages in the region of millions of euros. Those, however, should remain the exception.

A (bad) US influence?

Although compensatory and complementary remediation is new in the EU, it has existed in the US for more than 40 years. Federal legislation that imposes natural resource damage (NRD) liability includes the Oil Pollution Act 1990 (OPA) and the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).

Although CERCLA and OPA have a wider scope of liabilities for NRD than the ELD, there are many similarities between the three regimes, particularly in relation to primary, compensatory and complementary remediation. One major difference, however, is that CERCLA allows the Environmental Protection Agency (EPA) directly to implementremediation measures in specific cases, an approach that does not exist in Europe.

Fortunately for European operators, the Commission has always stated that it will not copy the US system and its known aberrations. US legislation was heavily influenced by the lobbying of American law firms which made millions of dollars out of the complexity of the US model.

Should financial security be mandatory?

During the preparation of the green paper of the directive many pressure groups brought to the attention of the Commission the fact that new risks imposed on the operators should be adequately financed.

Under Article 14(1) of the directive, member states are requested to encourage the development of financial security instruments and markets, with initiative for such developments coming from the private markets.

Over time, insurance has proved to be the most popular way of providing cover for environmental risks. For many years products have been widely available to cover sudden, accidental and even gradual pollution, including remediation costs, whether on an ‘all risks’ or on a ‘named perils’ basis. These policies may be sufficient to cover most of the costs involved in repairing damage to third parties. However, nature cannot be considered a third party under those policies.

This is the novelty of the directive: “nature” is represented by non-governmental organisations (NGOs), authorities or any other stakeholder that can now claim to be indemnified for damage or loss of service. Insurers such as ACE, Allianz, AXA CS, Chartis, Chubb, LIU and XL have all developed special policies to cover most (if not all) of the risks introduced in the ELD .

However, due to a lack of awareness or simply because the new risks are considered too small by a large majority of operators (confirmed by the low loss record), demand for the new insurance policies has so far been modest.

Is this a good reason to make insurance mandatory? A few pressure groups are pushing for it, either nationally or at a European level.

Insurers and risk managers are both strongly opposed to any mandatory arrangement, whether through pools or any other government schemes. This position has regularly been stated in reports of the ad hoc committee of the CEA (European Insurers Associations) of which FERMA (Federation of European Risk Management Associations) is a member.

Both parties prefer the freedom of underwriting, pricing and risk selection offered by a competitive market. At first, pools (nuclear, natural catastrophes, terrorism), when and where implemented, fulfilled a purpose but they laterproved to be much less flexible, economical and innovative than traditional insurance. The choice between deductibles, limits, wording, self-insurance and use of captives, is much larger in open markets.

What happens next?

The ELD will be reviewed by the Commission in 2014 and important changes could be made. It is to be hoped that the complexity of theoretical concepts will be clarified and differences in transposition across member states harmonised. The threat of a mandatory financial guarantee scheme, at first considered small, may be increasing. So, as suggested by the facilitators of the November workshop: “Let us create a sense of community and talk to each other.”

The views expressed in this article should not be considered to be the official position of FERMA or CEA.

Pierre Sonigo is the secretary general of FERMA and a member of the ELD ad hoc working group of the CEA. He can be contacted at: psonigo@gmail.com